This article was written by David Olsson.
Over the last few years, the opportunities for investing internationally and domestically in RMB have continued at pace. RMB’s longer-term potential has been recently further reinforced by its inclusion into the basket of currencies that constitute the International Monetary Fund’s Special Drawing Rights.
The expanded role of RMB in cross-border trade settlement is a key driver to RMB internationalisation. Investment channels have been expanded, the onshore financial markets have opened to foreign participation, and a series of mutual recognition programs allow investors to invest in one another’s onshore and offshore markets. Two-way channels also allow companies to sweep money on and offshore between affiliates.
The stock market correction of 2015 and the subsequent devaluation of the RMB gave rise to short-term currency volatility and some scepticism about the RMB’s longer-term trajectory, but despite this the currency’s global status seems assured. In our discussions with investors and market participants, we note a clear move towards a longer-term and more in-depth assessment of the potential role of RMB as an influential global currency. Our view remains that it is no longer a question of whether the RMB will become a global currency, but when it will do so.
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Increased use of RMB
- The RMB is now a core global currency with wide acceptance and use. It is the second most active currency for cross-border payments with China and Hong Kong, and the sixth most widely used currency for global trade with a share of 1.72% of global payments by value, and growing fast. At the end of 2015, more than 1,800 financial institutions worldwide were using yuan for payments, representing an annual increase of 12%.
- In 2015, Chinese investors invested a total of 736.3 billion yuan overseas, up from 186.6 billion yuan in 2014, representing nearly a three-fold increase. The volume of cross-border RMB receipts and payments reached 12.1 trillion yuan in 2015, representing an annual increase of 21.7%.
Continued market development and innovation
- The opening up of China’s domestic bond market (CIBM) has created a surge in the issuance of panda bonds by foreign corporates and sovereigns. In the first three quarters of 2016, nearly RMB 80 billion (USD 12 billion) panda bonds have been issued across 29 deals, surpassing dim sum bond issuance for the first time.
- China has also opened up its cards market. Previously, all RMB payments had to be cleared through China UnionPay, a network created by the central bank, which accounted for 72% of total transaction value in 2014. In 2015, China’s cabinet stated that foreign firms will be allowed to operate bank card clearing businesses. Rules regulating such businesses have been released by China’s central bank recently, potentially giving multinationals like Visa and MasterCard access to China’s 22 trillion yuan card payment market.
- The recent introduction of the credit default swaps (CDS) in China’s interbank market will allow investors to better manage and hedge their financial investments in China and nurture the healthy growth of the Chinese financial markets.
- China’s financial infrastructure is maturing with RMB internationalisation. In late 2015, the China’s central bank launched the Cross-border Interbank Payment System (CIPS), a SWIFT-like system that provides clearance and settlement services for cross-border RMB transactions. More recently, SWIFT and CIPS entered into a memorandum of understanding to develop China’s payments systems.
- Between 2014 and 2015, China appointed an additional 16 branches and subsidiaries of major Chinese banks to be official RMB clearing banks worldwide facilitating the effective settlement and clearance of offshore RMB trades. There are now over 20 such clearing banks with the most recent appointment being made in New York.
- RMB’s development also embraces technology and innovation. China is the world’s largest and fastest-growing e-commerce market, where sales are expected to reach $899.09 billion this year, representing 47% of all such sales worldwide. The rapid growth is fuelled by China’s online payment systems such as Alipay and Wechat Pay. China’s central bank has taken a keen interest in digital currency, and has set up a team with a view towards launching a digital legal tender in the near future.
- China’s opening up policy has improved its financial influence on the world stage. The inclusion on 1 October 2016 of the RMB in the IMF’s SDR basket of currencies made it the fifth currency to have this status conferred upon it – reflecting progress made by China in reforming and improving its monetary, foreign exchange, financial systems and markets.
- In August 2016, the World Bank issued the first SDR-denominated bonds in China, representing a vote of confidence in China’s financial markets.
- Following the footsteps of the Shanghai-Hong Kong stock connect and the recent announcement of the Shenzhen-Hong Kong stock connect, Shanghai and London have been discussing a similar link between the London and Shanghai exchanges. While Brexit has delayed the process, both sides have re-iterated their commitment to the project.
- The Australian Securities Exchange has supported RMB cash settlements by providing real-time straight-through-processing links to China, Hong Kong and the rest of the world. Recently, ASX launched an RMB securities depository service, providing full end-to-end support for the issuance, settlement and holding of RMB-denominated securities
Discussions around the role of the RMB need to be framed in the context of its steadily going influence and its growing role as a global trade and investment currency.
The RMB can no longer be regarded as an “emerging currency”. More sophisticated investment channels are coming on line regularly while others (such as QFII and RQFII) are well-known and understood by the international investment community.
Developments such as the opening up of the CIBM and the potential inclusion of Chinese shares into the benchmark indices of global index providers are very much welcomed. The Chinese government will need to continue its efforts not only to liberalise the capital account but to work towards building the trust and confidence of global investors.
For many international investors the discussions should now be turning to how best to tackle this complex market – which investment channels will yield the best opportunities going forward, and how can risks be managed. For financial institutions and companies that invest in their RMB capabilities and platforms the outlook is bright.